Fed's Evans Optimistic, Dudley Less So on Jobs Outlook

William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York.

Two top Federal Reserve policy doves offered clashing views on the U.S. economic outlook on Tuesday, although both agreed the job market has not yet improved enough to merit any cuts to the central bank's bond-buying program.

The influential chief of the New York Fed, William Dudley, told the Staten Island Chamber of Commerce he expects "sluggish" economic growth of 2 percent to 2.5 percent this year and only a modest decline in unemployment.

A weak March employment report, which showed the economy generated a paltry 88,000 jobs last month, made him more cautious on how far the economy has come, Dudley said.

He expects "at some point" to see sufficient evidence of improved economic momentum to favor gradually dialing back the pace of asset purchases, but, added, "Of course, any subsequent bad news could lead me to favor dialing them back up again."

Meanwhile, Chicago Fed President Charles Evans said he sees "moderate" growth this year of 2.5 percent and a "terrific" 2014.

"I am optimistic that this is going to be the year that really makes a difference and we start to take off towards the end of this year," Evans said at the Union League Club in the heart of Chicago's financial district.

Evans said he sees a "high probability" the Fed will need to keep buying bonds through at least the fall of this year to keep bringing down unemployment, now at 7.6 percent, though after that the Fed may be in a position to trim purchases, he said.

"I think it's entirely possible that by the end of 2013 we are beginning to exit the asset programs, winding them down, that's possible," he said. "I kind of think it might be into the first part of 2014, actually."

Frustrated with the slow and erratic economic recovery from the 2007-2009 recession, the Fed has kept interest rates at rock bottom since December 2008 and is buying $85 billion in Treasury and mortgage-backed securities each month to spur investment, hiring, and overall growth.

Fed's Duke: Rates Should Stay Low

Also on Tuesday, Fed Governor Elizabeth Duke told a group of community bankers that regulators recognize that low interest rates can cause difficulties for banks but said rates should stay low until the economy improves.

Unemployment was 7.6 percent in March, and the Fed has said it will keep buying bonds until the labor market outlook improves substantially.

Keeping interest rates low has helped keep many borrowers from missing loan payments even as the Fed's actions may be squeezing profits at some banks, Duke said at an American Bankers Association conference.

"Frankly, I would very much like to see higher rates, if higher rates went higher because the economy was stronger," Duke said. "I think to raise rates or to let rates rise in a very weak economy would ... make the environment that much more difficult."

Duke said the banking industry appears to be stronger after the 2007-09 financial crisis, with higher capital and liquidity levels in place and bank portfolios improving.

But she said low loan demand is hurting bank earnings.

"I hear that banks just won't lend or don't want to lend. I find no evidence of that," Duke said. "What I find is evidence of intense competition for loans, and the rest of you are making all the loans you can find to make." She said the one exception could be in mortgage lending, where credit remains tight.

Economic data released Tuesday underscored the need for the U.S. central bank to keep buying bonds apace.

U.S. consumer prices fell in March for the first time in four months while factory output slipped. Other data on Tuesday suggested the housing market recovery was losing momentum, even though housing starts jumped in March to their highest level since 2008.

Evans and Dudley each have a vote on the Fed's 12-member policy-setting panel, and their views on the need for continued bond purchases appear to be in sync with the majority of the committee, including Fed Chairman Ben Bernanke.

Minutes from the Fed's most recent meeting, in March, showed that most policymakers favored continued purchases through at least the summer, if not longer.

Exit Strategy

Once the Fed is in a position to start raising rates—only after unemployment has fallen to at least 6.5 percent—Evans said he would be "extremely open-minded" to crafting an exit strategy that would continue to give appropriate support to the economy. He did not elaborate, but he appeared to be suggesting support for the Fed to hold onto its mortgage-backed securities until they mature, rather than selling them gradually as the Fed has planned.

Speaking in Beijing earlier Tuesday, the hawkish head of the Philadelphia Fed, Charles Plosser, argued against that view, saying that at this point he would not want the U.S. central bank pledge not to sell assets in the years ahead.

Plosser wants to return the central bank's balance sheet to a more normal size around $1 trillion, from $3.2 trillion now, a process that could mean the Fed may sell assets faster than is currently expected, he has said.

Both Evans and Dudley said they were closely watching the effects that tighter fiscal policies will have on the economy.

Dudley has repeatedly complained that the U.S. government is not helping nurture the U.S. economy, which grew at a tepid 1.7 percent last year in part due to a lackluster fourth quarter, when super storm Sandy hit Staten Island and the surrounding area hard, including large parts of New York City and the New Jersey Shore.

Growth is expected to have picked up in the first quarter of this year, but a large package of government spending cuts as well as higher taxes could yet dampen activity.

Dudley said he expects clarity on the effects of the fiscal tightening, "for better or worse," in coming months.

The Fed policymaker pointed, however, to consumer spending, the housing market, and investment in equipment and software as bright spots in the U.S.

Evans, a voter this year on the Fed's policysetting panel, repeated his view he would want to see job gains of at least 200,000 a month for several month, and above-trend gross domestic product growth, before declaring that milestone to have been met.

If all goes well, he said, "2014 is really the year that we get out of this" and the year should bring "tremendous improvement" in the labor market outlook. GDP is likely to grow at a 3.5 percent pace next year, he said.

Evans said the Fed need not take a longtime to wind down its $85 billion of monthly asset purchases if the labor market outlook improves substantially, but could end them "in a couple of weeks" if needed.